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Sunday, 8 July 2018

Major banks pass peak fear

Out of commission

A Royal Commission into financial services misconduct always had the potential to represent a tumultuous period for Australia's major banks.

Emerging stories have ranged from the banal to the trivial, to the troubling and the downright nauseating.

But for all that, there's been no 'smoking gun' to cause a collapse in share prices. 

Interim report looms

Commonwealth Bank of Australia (ASX: CBA) has been battered more than most through the hearings, and not without reason, with a range of adverse findings coming to light. 

Since going ex-dividend in the second week of February the CBA share price took quite a tumble, inevitably leading an army of technical analysts to predict a breakout lower.

But instead the opposite happened, with the share price now essentially back to where it was back in September last year before the hearings kicked off (click to enlarge the image).

Some early disclosure here, I bought CBA in the $68-69 range (some of my general market thoughts and trade ideas are discussed on my Twitter feed - I also bought Telstra at $2.87 immediately before of the proposed restructure, but let's not talk about that). 

As the deadline for the interim Royal Commission report looms, the CBA share price has gained more than 12 per cent since mid-June.  

Ruthless efficiency?

It's worth noting that with a PE ratio hovering around 13 and a price-to-book of about 2, the market is not pricing in significant downside for CBA, nor for that matter its industry peers. 

There may have been a relative shift in sentiment between residential property and equities helping to drive the S&P ASX 200 to a 10½ year high, although what this means for bank valuations may be somewhat reflexive given that the banks have heavy exposure to mortgages.

Markets might also be assigning the Coalition a marginally higher chance of election success on the back of its personal income tax cuts policy, although betting markets aren't much moved. 

The major banks do continue to grapple with a potential loss of market share, as discussed in more detail in our Chemical Change report back in April. 

Of course, markets are not always rational, but they normally are, and they're usually more efficient than many people seem to think.

And the market voting machine is presently judging that the four major banks will emerge from the Royal Commission a little bruised but relatively unscathed, with the hapless AMP bearing the brunt of share price pain.